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Hedging Annuity Risks with the Age-Period-Cohort Two-Population Gravity Model

Dowd, K.; Cairns, A.J.G.; Blake, D.

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A.J.G. Cairns

D. Blake


We consider the effectiveness of an illustrative annuity hedging problem in which a forward annuity predicated on one population is hedged by a position in a forward annuity predicated on another population. Our analysis makes use of the age-period-cohort two-population gravity model that takes account of the observed interdependence between the two populations’ mortality rates; it also considers the implications of parameter uncertainty, individual death or Poisson risk, and interest-rate risk for hedge effectiveness. We consider horizons of up to 20 years. For the most part, our results are robust and indicate strong hedge effectiveness, with estimates of relative risk reduction varying from about 70% in the least effective case to well over 95% in the most effective cases.

Journal Article Type Article
Acceptance Date Jul 30, 2018
Online Publication Date Nov 20, 2019
Publication Date 2019
Deposit Date Jan 2, 2018
Publicly Available Date May 20, 2020
Journal North American Actuarial Journal
Print ISSN 1092-0277
Electronic ISSN 2325-0453
Publisher Taylor and Francis Group
Peer Reviewed Peer Reviewed
Volume 25
Issue sup1
Pages S170-S181
Public URL


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